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Trade Shocks and Credit Reallocation

Author

Listed:
  • Stefano Federico
  • Fadi Hassan
  • Veronica Rappoport

Abstract

This paper identifies a credit-supply contraction that arises endogenously after trade liberalization. Banks with loan portfolios concentrated in sectors exposed to competition from China face an increase in non-performing loans after China’s entry into the World Trade Organization. As a result, they reduce the supply of credit to firms, irrespective of the firm’s sector of operation. This cut in credit translates into lower employment, investment, and output. Through this mechanism, the financial channel amplifies the shock to firms already hit by import competition from China and passes it on to firms in sectors expected to expand upon trade liberalization.

Suggested Citation

  • Stefano Federico & Fadi Hassan & Veronica Rappoport, 2023. "Trade Shocks and Credit Reallocation," NBER Working Papers 31111, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31111
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    Cited by:

    1. Mathias Hoffmann & Lilia Ruslanova, 2020. "Softening the blow: U.S. state-level banking deregulation and sectoral reallocation after the China trade shock," ECON - Working Papers 365, Department of Economics - University of Zurich, revised Apr 2021.
    2. Bernini Federico Gastón & Donaldson Paula & Garcia-Lembergman Ezequiel & Juárez Leticia, 2024. "The Financial Channel of Tax Amnesty Policies," Asociación Argentina de Economía Política: Working Papers 4710, Asociación Argentina de Economía Política.
    3. Simon Lloyd & Dennis Reinhardt & Rhiannon Sowerbutts, 2023. "Financial services trade restrictions and lending from an international financial centre," Bank of England working papers 1022, Bank of England.
    4. Banerjee, Utsa & Peñarrieta, Luis Castro & Chakraborty, Pavel, 2025. "Can trade policy change gender equality? Evidence from Chile," Journal of International Economics, Elsevier, vol. 157(C).
    5. Federico Cingano & Fadi Hassan, 2020. "International financial flows and misallocation," CEP Discussion Papers dp1697, Centre for Economic Performance, LSE.
    6. Felipe Benguria & Dennis Novy, 2025. "How to Grow an Invoicing Currency: Micro Evidence from Argentina," CESifo Working Paper Series 11964, CESifo.
    7. Esposito, Federico & Hassan, Fadi, 2023. "Import competition, trade credit and financial frictions in general equilibrium," LSE Research Online Documents on Economics 121378, London School of Economics and Political Science, LSE Library.
    8. Laura Alfaro & Mariya Brussevich & Camelia Minoiu & Andrea F. Presbitero, 2025. "Bank Financing of Global Supply Chains," NBER Working Papers 33754, National Bureau of Economic Research, Inc.
    9. Cao, Jin & Dinger, Valeriya & Juelsrud, Ragnar Enger & Liaudinskas, Karolis, 2022. "Trade conflicts and credit supply spillovers: Evidence from the nobel peace prize trade shock," BOFIT Discussion Papers 8/2022, Bank of Finland Institute for Emerging Economies (BOFIT).
    10. Berthou, Antoine & Mayer, Thierry & Mésonnier, Jean-Stéphane, 2024. "Good connections : Bank specialization and the tariff elasticity of exports," Journal of International Economics, Elsevier, vol. 152(C).
    11. Cao, Jin & Dinger, Valeriya & Juelsrud, Ragnar E. & Liaudinskas, Karolis, 2022. "Trade conflicts and credit supply spillovers : Evidence from the Nobel Peace Prize trade shock," BOFIT Discussion Papers 8/2022, Bank of Finland, Institute for Economies in Transition.
    12. Ricardo Correa & Julian di Giovanni & Linda S. Goldberg & Camelia Minoiu, 2023. "Trade Uncertainty and U.S. Bank Lending," NBER Working Papers 31860, National Bureau of Economic Research, Inc.
    13. Donni Fajar Anugrah & Cicilia Anggadewi Harun & Dian Rahmawati & Sulistiyo Kadam Ardiyono & Hilya Jannatul Imron, 2024. "Measuring Export Diversification Strategies Amid Global Geo-Economic Fragmentation," Working Papers WP/06/2024, Bank Indonesia.
    14. Friederike Niepmann & Leslie Sheng Shen, 2025. "Geopolitical Risk and Global Banking," International Finance Discussion Papers 1418, Board of Governors of the Federal Reserve System (U.S.).
    15. Cai, Yue, 2021. "Expansionary monetary policy and credit allocation: Evidence from China," China Economic Review, Elsevier, vol. 66(C).
    16. Christian Keuschnigg & Michael Kogler, 2022. "Trade and credit reallocation: How banks help shape comparative advantage," Review of International Economics, Wiley Blackwell, vol. 30(1), pages 282-305, February.
    17. Izadi, Mohammad & Saadi, Vahid, 2023. "Banking Market Structure and Trade Shocks," Journal of Banking & Finance, Elsevier, vol. 153(C).

    More about this item

    JEL classification:

    • F1 - International Economics - - Trade
    • F60 - International Economics - - Economic Impacts of Globalization - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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